CRS Annotated Constitution

The Law
Applied in Diversity Cases.—By virtue of Sec. 34 of the Judiciary Act of
1789,987 state law expressed in constitutional and
statutory form was regularly applied in federal courts in
diversity actions to govern the disposition of such cases.
But in Swift v. Tyson,988 Justice Story for the
Court ruled that state court decisions were not laws
within the meaning of Sec. 34 and though entitled to
respect were not binding on federal judges, except with
regard to matters of a “local nature,” such as statutes
and interpretations thereof pertaining to real estate and
other immovables, in contrast to questions of general
commercial law as to which the answers were dependent not
on “the decisions of the local tribunals, but in the
general principles and doctrines of commercial
jurisprudence.”989 The course of decision over
the period of almost one hundred years was toward an
expansion of the areas in which federal judges were free
to construct a federal common law and a concomitant
contraction of the definition of “local” laws.990
Although[p.768]dissatisfaction with Swift
v. Tyson was almost always present, within and without the
Court,991 it was the Court’s decision in Black
& White Taxicab & Transfer Co. v. Brown
& Yellow Taxicab & Transfer Co.,992
which brought disagreement to the strongest point and
perhaps precipitated the overruling of Swift v. Tyson in
Erie Railroad Co. v. Tompkins.993

“It is impossible to overstate the importance of the
Erie decision. It announces no technical doctrine of
procedure or jursidiction, but goes to the heart of the
relations between the federal government and the states,
and returns to the states a power that had for nearly a
century been exercised by the federal government.”994
Erie was remarkable in a number of ways aside from the
doctrine it announced. It reversed a 96–year–old
precedent, which counsel had specifically not questioned,
it reached a constitutional[p.769]decision
when a statutory interpretation was available though
perhaps less desirable, and it marked the only time in
United States constitutional history when the Court has
held that it had undertaken an unconstitutional
action.995

Tompkins was injured by defendant’s train while he was
walking along the tracks. He was a citizen of
Pennsylvania, and the railroad was incorporated in New
York. Had he sued in a Pennsylvania court, state
decisional law was to the effect that inasmuch as he was a
trespasser, the defendant owned him only a duty not to
injure him through wanton or willful misconduct;996
the general federal law treated him as a licensee who
could recover for negligence. Tompkins sued and recovered
in federal court in New York and the railroad presented
the issue to the Supreme Court as one covered by “local”
law within the meaning of Swift v. Tyson. Justice Brandeis
for himself and four other Justices, however, choose to
overrule the early case.

First, it was argued that Tyson had failed to bring
uniformity of decision about and that its application
discriminated against citizens of a State by noncitizens.
Justice Brandeis cited recent researches997
indicating that Sec. 34 of the 1789 Act included court
decisions in the phrase “laws of the several States.” “If
only a question of statutory construction were involved we
should not be prepared to abandon a doctrine so widely
applied throughout nearly a century. But the
unconstitutionality of the course pursued has now been
made clear, and compels us to do so.”998 For a number
of reasons, it would not have been wise to have overruled
Tyson on the basis of arguable new discoveries.999
Second, then, the decision[p.770]turned on
the lack of power vested in Congress to have prescribed
rules for federal courts in state cases. “There is no
federal general common law. Congress has no power to
declare substantive rules of common law applicable in a
State whether they be local in their nature or ‘general,’
be they commercial law or a part of the law of torts. No
clause in the Constitution purports to confer such a power
upon the federal courts.”1000 But having said this,
Justice Brandeis made it clear that the unconstitutional
assumption of power had been made not by Congress but by
the Court itself. “[W]e do not hold unconstitutional Sec.
34 of the Federal Judiciary Act of 1789 or any other Act
of Congress. We merely declare that in applying the
doctrine this Court and the lower courts have invaded
rights which in our opinion are reserved by the
Constitution to the several States.”1001

Third, the rule of Erie replacing Tyson is that
“[e]xcept in matters governed by the Federal Constitution
or by Acts of Congress, the law to be applied in any case
is the law of the State. Whether the law of the State
shall be declared by its Legislature in a statute or by
its highest court in a decision is not a matter of federal
concern.”1002

Since 1938, the effect of Erie has first increased and
then diminished, as the nature of the problems presented
changed. Thus, the Court at first indicated that not only
the decision of the highest court of a State were binding
on a federal court in diversity but as well intermediate
appellate courts1003 and courts of first
in[p.771]stance,1004 even where
the decisions bound no other state judge except as they
were persuasive on their merits. It has now retreated from
this position to the extent that federal judges are to
give careful consideration to lower state court decisions
and to old, perhaps outmoded decisions, but they must find
for themselves the state law where the State’s highest
court has not spoken definitively and within a period
which would raise no questions about the continued
viability of the decision.1005 In the event of a
state supreme court reversal of an earlier decision, the
federal courts are, of course, bound by the later
decision, and a judgment of a federal district court,
correct when rendered, must be reversed on appeal if the
State’s highest court in the meantime has changed the
applicable law.1006 In diversity cases which
present conflicts of law problems, the Court has
reiterated that the district court is to apply the law of
the State in which it sits, so that in a case in State A
in which the law of State B is applicable, perhaps because
a contract was made there or a tort was committed there,
the federal court is to apply State A’s conception of
State B’s law.1007

The greatest difficulty in applying the Erie doctrine
has been in cases in which issues of procedure were
important.1008 The process was initiated in
1945 when the Court held that a state statute of
limitations, which would have barred suit in state court,
would bar it in federal court, although as a matter of
federal law the case still could have been brought in
federal court.1009 The Court regarded the
substance–procedure distinction as immaterial. “[S]ince a
federal court adjudicating a state–created right solely
because of[p.772]the diversity of
citizenship of the parties is for that purpose, in effect,
only another court of the State, it cannot afford recovery
if the right to recover is made unavailable by the State
nor can it substantially affect the enforcement of the
right as given by the State.”1010 The standard
to be applied was compelled by the “intent” of the Erie
decision, which “was to insure that, in all cases where a
federal court is exercising jurisdication solely because
of the diversity of citizenship of the parties, the
outcome of the litigation in the federal court should be
substantially the same, so far as legal rules determine
the outcome of a litigation, as it would be if tried in a
State court.”1011 The Court’s application of
this standard created substantial doubt that the Federal
Rules of Civil Procedure had any validity in diversity
cases.1012

But in two later cases, the Court contracted the
application of Erie in matters governed by the Federal
Rules. Thus, in the earlier case, the Court said that
“outcome” was no longer the sole determinant and
countervailing considerations expressed in federal policy
on the conduct of federal trials should be considered; a
state rule making it a question for the judge rather than
a jury of a particular defense in a tort action had to
yield to a federal policy enunciated through the Seventh
Amendment of favoring juries.1013 The latter
ruling simplified the matter greatly. Erie is not to be
the proper test when the question is the application of
one of the Rules of Civil Procedure; if the rule is valid
when measured against the Enabling Act and the
Constitution, it is to be applied regardless of state law
to the contrary.1014

Supplement: [P. 772, add to text following n.1013:]

Some confusion has been injected into consideration of which law to apply—state or federal—in the absence of a federal statute or a Federal Rule of Civil Procedure.31 In an action for damages, the federal courts were faced with the issue of the application either of a state statute, which gave the appellate division of the state courts the authority to determine if an award is excessive or inadequate if it deviates materially from what would be reasonable compensation, or of a federal judicially–created practice of review of awards as so exorbitant that it shocked the conscience of the court. The Court determined that the state statute was both substantive and procedural, which would result in substantial variations between state and federal damage awards depending on whether the state or the federal approach was applied; it then followed the mode of analysis exemplified by those cases emphasizing the importance of federal courts reaching the same outcome as would the state courts,32 rather than what had been the prevailing standard, in which the Court balanced state and federal interests to determine which law to apply.33 Emphasis upon either approach to considerations of applying state or federal law reflects a continuing difficulty of accommodating “the constitutional power of the states to regulate the relations among their citizens . . . [and] the constitutional power of the federal government to determine how its courts are to be operated.” 34 Additional decisions will be required to determine which approach, if either, prevails.

Although it seems clear that Erie applies in
nondiversity cases in which the source of the right sued
upon is state law,1015 it is equally clear that Erie
is not applicable always in diversity cases whether the
nature of the issue be substantive or procedural.
Thus,[p.773]it may be that there is an
overriding federal interest which compels national
uniformity of rules, such as a case in which the issue is
the appropriate rule for determining the liability of a
bank which had guaranteed a forged federal check,1016
in which the issue is the appropriate rule for determining
whether a tortfeasor is liable to the United States for
hospitalization of a soldier and loss of his
services,1017 and in which the issue is the
appropriate rule for determining the validity of a defense
raised by a federal officer sued for having libeled one in
the course of his official duties.1018 In such
cases, when the issue is found to be controlled by federal
law, common or otherwise, the result is binding on state
courts as well as on federal.1019 Despite,
then, Justice Brandeis’ assurance that there is no
“federal general common law,” there is a common law
existing and developing in the federal courts, even in
diversity cases, which will sometimes control
decision.1020

Footnotes

987
The section provided that “the laws of the several
states, except where the constitution, treaties, or
statutes of the United States shall otherwise require or
provide, shall be regarded as rules of decision in
trials at common law in the courts of the United States
in cases where they apply.”
1 Stat. 92
. With only insubstantial changes, the section
now appears as
28 U.S.C.
Sec. 1652
. For a concise review of the entire issue, see
C. Wright, Handbook of the Law of Federal Courts (St.
Paul; 4th ed. 1983), ch. 9.

988
16 Pet. (41 U.S.) 1 (1842). The issue in the case
was whether a pre–existing debt was good consideration
for an indorsement of a bill of exchange so that the
endorsee would be a holder in due course.

989
Id., 19. The Justice concluded this portion of the
opinion: “The law respecting negotiable instruments may
be truly declared in the language of Cicero, adopted by
Lord Mansfield in Luke v. Lyde, 2 Burr. R. 883, 887, to
be in great measure, not the law of a single country
only, but of the commercial world. Nun erit alia lex
Romae, alia Athenis; alia munc, alia posthac, sed et
apud omnes gentes, et omni tempore una eademque lex
obtenebit.” Ibid. The thought that the same law should
prevail in Rome as in Athens was used by Justice Story
in DeLovia v. Boit,
7 Cas.418,443
(No.3776) (C.C.D. Mass. 1815). For a
modern utilization, see United States v. Jefferson
County Board of Education, 372 F. 2d 836, 861 (5th Cir.
1966); id., 380 F. 2d 385, 398 (5th Cir. 1967)
(dissenting opinion).

992276 U.S. 518 (1928). B. &
W. had contracted with a railroad to provide exclusive
taxi service at its station. B. & Y. began
operating taxis at the same station and B. & W.
wanted to enjoin the operation, but it was a settled
rule by judicial decision in Kentucky courts that such
exclusive contracts were contrary to public policy and
were unenforceable in court. Therefore, B. & W.
dissolved itself in Kentucky and reincorporated in
Tennessee, solely in order to create diversity of
citizenship and enable itself to sue in federal court.
It was successful and the Supreme Court ruled that
diversity was present and that the injunction should
issue. In Mutual Life Ins. Co. v. Johnson,
293 U.S. 335 (1934), the Court, in
an opinion by Justice Cardozo, appeared to retreat
somewhat from its extensions of Tyson, holding that
state law should be applied, through a “benign and
prudent comity,” in a case “balanced with doubt,” a
concept first used by Justice Bradley in Burgess v.
Seligman,
107 U.S. 20 (1883).

993304 U.S. 64 (1938). Judge Friendly
has written: “Having served as the Justice’s
[Brandeis’s] law clerk the year Black & White
Taxicab & Transfer Co. v. Brown & Yellow
Taxicab & Transfer Co. came before the Court, I
have little doubt he was waiting for an opportunity to
give Swift v. Tyson the happy dispatch he thought it
deserved.” H. Friendly, Benchmarks (Chicago: 1967),
20.

994
C. Wright, Handbook of the Law of Federal Courts
(4th ed. 1983), 355. See Judge Friendly’s exposition, In
Praise of Erie—And of the New Federal Common Law, in H.
Friendly, Benchmarks (Chicago: 1967), 155.

999
Congress had re–enacted Sec. 34 as Sec. 721 of the
Revised Statutes, citing Swift v. Tyson in its
annotation, thus presumably accepting the gloss placed
on the words by that ruling. But note that Justice
Brandeis did not think even the re–enacted statute was
unconstitutional. Infra, text at n. 1001. See H.
Friendly, Benchmarks (Chicago: 1967), 161–163. Perhaps a
more compelling reason of policy was that stated by
Justice Frankfurter rejecting for the Court a claim that
the general grant of federal question jurisdiction to
the federal courts in 1875 made maritime suits
cognizable on the law side of the federal courts.
“Petitioner now asks us to hold that no student of the
jurisdiction of the federal courts or of admiralty, no
judge, and none of the learned and alert members of the
admiralty bar were able, for seventy–five years, to
discern the drastic change now asserted to have been
contrived in admiralty jurisdiction by the Act of 1875.
In light of such impressive testimony from the past the
claim of a sudden discovery of a hidden latent meaning
in an old technical phrase is surely suspect.

“The history of archeology is replete with the
unearthing of riches buried for centuries. Our legal
history does not, however, offer a single archeological
discovery of new, revolutionary meaning in reading an
old judiciary enactment. [Here, the Justice footnotes:
‘For reasons that would take us too far afield to
discuss, Erie R. Co. v. Tompkins, 304 U.S. 64, is no
exception.’] The presumption is powerful that such a
far–reaching, dislocating construction as petitioner
would now have us find in the Act of 1875 was not
uncovered by judges, lawyers or scholars for
seventy–five years because it is not there.” Romero v.
International Terminal Operating Co.,
358 U.S. 354, 370–371 (1959).

1000
Id., 304 U.S., 78. Justice Brandeis does not argue
the constitutional issue and does not cite either
provisions of the Constitution or precedent beyond the
views of Justices Holmes and Field. Id., 78–79. Justice
Reed thought that Article III and the necessary and
proper clause might contain authority. Id., 91–92
(Justice Reed concurring in the result). For a
formulation of the constitutional argument in favor of
the Brandeis position, see H. Friendly, Benchmarks
(Chicago: 1967), 167–171. See also Bernhardt v.
Polygraphic Co. of America,
350 U.S. 198, 202, 208 (1956);
Hanna v. Plumer,
380 U.S. 460, 471–472 (1965).

1005
King v. Order of Commercial Travelers of
America,
333 U.S. 153 (1948); Bernhardt v.
Polygraphic Co. of America,
350 U.S. 198, 205 (1956) (1910 decision
must be followed in absence of confusion in state
decisions since, “no developing line of authorities that
cast a shadow over established ones, no dicta, doubts or
ambiguities . . . , no legislative development that
promises to undermine the judicial rule”). See also
Commissioner v. Estate of Bosch,
387 U.S. 456, 465 (1967).

1008
Interestingly enough, 1938 marked what seemed to be
a switching of positions vis–a-vis federal and state
courts of substantive law and procedural law. Under
Tyson, federal courts in diversity actions were free to
formulate a federal common law, while they were required
by the Conformity Act, Sec. 5,
17 Stat. 196
(1872), to conform their procedure to that of
the State in which the court sat. Erie then ruled that
state substantive law was to control in federal court
diversity actions, while by implication matters of
procedure in federal court were subject to congressional
governance. Congress authorized the Court to promulgate
rules of civil procedure,
48 Stat. 1064
(1934), which it did in 1938, a few months after
Erie was decided. 302 U.S. 783.

1012
Cohen v. Beneficial Industrial Loan Corp.,
337 U.S. 541 (1949) (state rule
making unsuccessful plaintiffs liable for all expenses
and requiring security for such expenses as a condition
of proceeding applicable in federal court); Woods v.
Interstate Realty Co.,
337 U.S. 535 (1949) (state statute
barring foreign corporation not qualified to do business
in State applicable in federal court); Ragan v.
Merchants Transfer & Warehouse Co.,
337 U.S. 530 (1949) (state rule
determinative when an action is begun for purposes of
statute of limitations applicable in federal court
although a Federal Rule of Civil Procedure states a
different rule).

1018
Howard v. Lyons,
360 U.S. 593 (1959). Matters
concerned with our foreign relations also are governed
by federal law in diversity. Banco National de Cuba v.
Sabbatino,
376 U.S. 398 (1964). Federal common
law also governs a government contractor defense in
certain cases. Boyle v. United Technologies Corp.,
487 U.S. 500 (1988).

1020
The quoted Brandeis phrase is in Erie Railroad Co.
v. Tompkins
304 U.S. 64, 78 (1938). On the same day
Erie was decided, the Court, in an opinion by Justice
Brandeis, held that the issue of apportionment of the
waters of an interstate stream between two States “is a
question of ‘federal common law.”’ Hinderlider v. La
Plata River & Cherry Creek Ditch Co.,
304 U.S. 92, 110 (1938). On the
matter, see Illinois v. City of Milwaukee,
406 U.S. 91 (1972).

Supplement Footnotes

31
Gasperini v. Center for Humanities, Inc.,
518 U.S. 415 (1996)
. The decision was 5 to 4, so that the precedent may or may not be stable for future application.